Giving Credit Where Due: Facebook Streamlines Payments System

When Facebook announced last year that its Credits payment system would become the de facto form of currency for purchases made inside games hosted by Facebook, we got the first taste of the social giant’s lofty, iTunes-sized aspirations. However much Facebook downplayed the idea, the company wanted in on a potentially lucrative revenue stream, akin to that of Apple’s iTunes, which was responsible for roughly $6 billion in revenue in its fiscal year 2011.

Cut to today, 18 months later. In what seems to be an abrupt about-face, Facebook announced that it will slowly move away from its Credits initiative, beginning in the third quarter, transitioning third-party developers away from a platform-wide currency to a model where users can use their local form of currency to purchase virtual goods and apps (e.g., USD for the Yanks; or euros for, say, a Parisian).

Come July, developers will be able to accept local currency for in-app purchases instead of Credits, and Facebook plans to phase out Credits entirely by the end of 2012.

So what gives? Is Facebook scaling back its payment ambitions?

Initially, Facebook’s idea was this: Consolidate the form of currency on the Facebook platform so that all game developers must accept Credits as the one and only form of money that third-party apps on Facebook could accept from users to pay for goods and services. Cut out the middlemen like Jambool and Spare Change, and Facebook gets a 30 percent cut of every transaction that goes through its platform. Just like iTunes.

Facebook envisioned that developers would then use Credits as the currency inside their respective games as well, so users could just spend Facebook Credits on virtual goods across different apps, be it a new prize heifer in FarmVille or a cache of weapon parts in Mafia Wars. No matter how many games you played, Facebook imagined, it would offer one unified currency to rule them all, for a simplified user experience.

That didn’t happen. Instead, developers continued to require users to convert Facebook Credits to yet another form of virtual currency, specific to that of each game (FarmVille, for example, has FarmVille cash). Why? Most likely because it’s in game developers’ best interests to obfuscate the true value of in-game cash, compared to what you’ve paid for it in real cash. (It’s easier for me to spend 5,000 Farmville bucks when I don’t immediately register its true value, for instance. Might be more difficult for me to spend 10 Facebook Credits that I know I spent $1 to get.)

That makes for three separate forms of currency from each end of the transaction chain: Real-world currency (like the dollar), Facebook currency (Credits), and app developer currency (FarmVille cash). What’s more, it’s a global system, meaning multiple forms of real-world currencies, with fluctuating values, depending on the country. So, while my five bucks in California may buy five Credits, five pounds in London would net me 7.866 Credits.

It’s a user-experience nightmare, with far too many friction points for one to go through in order to spend money. The fewer hang-ups in the chain, the faster and easier it will be to spend. It’s almost as if Facebook inhibited its own payments progress with Credits (if only the third-party developers would have played along …).

So, in theory, the forthcoming transition will serve to streamline the payments process for consumers. Developers can still require users to convert that cash to a proprietary form of in-game currency, though without the Credits conversion hassle. And Facebook doesn’t lose anything in terms of revenue, as it will continue to take its 30 percent cut of all transactions made on its platform. And, just as before, any customer using Facebook’s payments platform has their credit card information on file with Facebook.

Zynga seems to welcome the change with open arms. “We’re proud of the long-term partnership we have with Facebook and today’s announcement doesn’t change the economic relationship between the two companies,” a Zynga spokesperson told me. “We believe Facebook’s new payment product to support pricing in local currency will streamline payment methods on their Platform and ultimately offer more flexible pricing options.”

Also beginning in July, Facebook will allow developers to offer subscription payment services. So if, say, developers charge monthly for a premium version of a game, they’ll be allowed to accept automatic recurring payments, as long as the user continues his or her subscription. That’s an easy revenue stream that will most likely be attractive to third-party app developers, both existing and prospective. It’s one that Zynga is already testing in a few of its Facebook games, and looks likely to implement in more games going forward.

By dumping Credits, it could signal Facebook closing the door on what many imagined would ultimately be a larger payments undertaking for the company. When Credits first debuted, it was seen as an incremental step towards something larger, perhaps a Facebook wallet with which users could pay for physical goods at brick-and-mortar stores.

But with the Google Wallets, Isis coalitions and actual, government-backed currencies in the world, it’s possible Facebook recognized that it didn’t need to play in that very crowded space.

Perhaps its own iTunes, however far off, will be enough.

UPDATE: An earlier version of this article misstated the nature of Facebook’s change to its payments system in the headline, claiming that the company was scaling back its payments initiative. The piece has been amended to reflect the changes.

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